Learn how to effectively split an inherited IRA between siblings, ensuring fair distribution and understanding tax implications.
Inheriting an IRA with siblings can be challenging. Disagreements about fairness or confusion over tax rules may cause stress during an already emotional time. Many families face these struggles after inheriting retirement accounts.
Specific rules apply based on who the beneficiaries are and how the account is divided. The account owner's death triggers these rules, and under the SECURE Act, non-spouse beneficiaries must withdraw all funds within 10 years—this includes siblings sharing the same inheritance.
This guide breaks it down step-by-step. You'll learn how to split the inherited IRA fairly, avoid IRS penalties, and reduce conflicts with your siblings. Keep reading to help smooth this process over for everyone involved!
Check the IRA's beneficiary designation form. This document shows who inherits the account and their shares. If multiple siblings are listed, the split should match the percentages or instructions provided by the original IRA owner.
Confirm if all beneficiaries qualify as eligible designated beneficiaries under current IRS rules. Chronically ill individuals qualify as 'eligible designated beneficiaries' under the SECURE Act, allowing them certain advantages with respect to Required Minimum Distributions (RMDs) when inheriting an IRA. Divide funds according to these designations or percentages to ensure compliance.
Clear communication helps avoid disputes.
After inheriting an IRA, siblings can split it into separate accounts. This ensures each sibling manages their share independently and avoids disputes.
Taxes can vary based on how and when you take money from an inherited IRA—learn the rules to avoid surprises.
An important consideration is the IRA's tax status, which involves unique taxation rules where taxes are deferred until withdrawals are made, influencing regulations like Required Minimum Distributions (RMDs) for inherited accounts.
RMDs are mandatory withdrawals from an inherited IRA. If the original IRA owner reached RMD age (currently 73) before death, the beneficiary must continue taking distributions yearly.
The IRS' RMD table outlines how much you need to withdraw based on life expectancy. Failing to take RMDs results in a penalty—50% of the amount not withdrawn. These rules are designed to prevent the creation of what is essentially an eternal IRA, where the account continues to grow tax-free indefinitely as it is passed down through generations.
If siblings inherit an account, each sibling needs to calculate and take their own required minimum distribution individually after splitting accounts. The next step explains rules for beneficiaries under the 10-Year Rule.
Non-spouse beneficiaries must empty the inherited IRA account within 10 years of the original IRA owner's death. This rule applies to both traditional IRAs and Roth IRAs. There are no annual required minimum distribution (RMD) rules for non-spouse beneficiaries under this timeline, but all funds must be withdrawn before the end of the tenth year.
This withdrawal will trigger taxes based on the type of IRA. For a traditional IRA, withdrawals will count as ordinary income and may increase your total tax liability. In contrast, inherited Roth IRAs generally allow tax-free withdrawals if held for at least five years. However, with traditional IRAs, individuals must eventually pay taxes on the account's growth to ensure tax revenue is generated.
Be cautious when planning distributions—large lump sums could move you into higher tax brackets. The 10-year rule offers flexibility but requires thoughtful tax planning.
Selecting a withdrawal method affects taxes and future savings. It's important to note that you will need to pay taxes on the amounts withdrawn, especially under regulations like the 10-year rule, which ensures the government receives tax revenue from the retirement account.
A lump-sum withdrawal means taking all the inherited IRA funds at once. This option gives immediate access to the money, but you will be responsible for paying ordinary income taxes on the withdrawn funds, which will be taxed according to your income for that year. The entire amount adds to your income for that year, which could push you into a higher tax bracket.
Adult siblings splitting an inherited IRA may consider this if they need cash fast. But it's not always the best long-term choice. The withdrawal loses any future tax-deferred growth of the account.
Careful planning is key—especially if large amounts are involved or income taxes will increase significantly.
Periodic distributions allow splitting an inherited IRA into smaller withdrawals. This spreads income over years and lowers yearly taxes. Siblings taking action together can choose this if it suits their financial goals. Recipients must pay ordinary income taxes on the money withdrawn, which is determined by their income for the year.
Distributions must follow the IRS' RMD table or the rule for withdrawing within 10 years of the original owner's death. Each sibling owns individually managed accounts, which ensures flexibility in handling payments and taxes owed.
Minor beneficiaries have unique rules and protections—understanding these is key to handling their share properly.
Required minimum distributions (RMDs) are mandated by law to generate tax revenue, preventing the perpetuation of tax-free growth for inherited accounts over generations.
The age of majority is when a child becomes a legal adult. This age is 18 in most states but may vary. For inherited IRAs, minor children cannot control the account until they reach this age.
A guardian manages the inherited IRA for the child until adulthood. Once they turn 18—or older in some states—they take full control over distributions and decisions. Taxes still apply on withdrawals, so planning ahead matters.
Minors cannot manage an inherited IRA on their own. A guardian must oversee the account until the child reaches the age of majority, which varies by state—often 18 or 21.
The guardian handles required minimum distributions (RMDs) and ensures taxes are paid. They must follow rules for inherited IRAs, like taking distributions within 10 years if it's a parent's traditional IRA.
Once the minor comes of age, control of the inherited retirement account is transferred to them.
Open dialogue prevents misunderstandings—work together to ensure a smooth and fair process.
Siblings must decide how to split an inherited IRA fairly. Review the deceased owner's wishes in the will or beneficiary designation form. If no clear instructions exist, consider dividing equally, as this avoids disputes.
Discuss financial needs openly with each sibling. Some may prefer cash from a lump-sum withdrawal, while others might benefit more by keeping funds in individual retirement accounts longer for tax advantages.
Clear communication is key to avoiding conflicts. Discuss the inherited IRA split with all siblings early. Ensure everyone understands their share, tax obligations, and rights as beneficiaries.
A neutral financial advisor can help mediate disagreements. They guide decision-making without bias, ensuring fair treatment for all parties involved in splitting the inherited account.
Make sure beneficiary designations and estate plans are accurate. This helps avoid confusion or legal issues.
Splitting an inherited IRA among siblings can be straightforward with the right approach. Start by confirming the beneficiaries and their shares. Setting up separate accounts can help prevent complications later.
Smart distribution choices start with a clear understanding of tax rules. Open communication fosters fairness and minimizes conflicts. By taking early action, siblings can streamline the process and reduce stress for everyone involved.
When siblings inherit a parent's traditional IRA, the account can be split into multiple inherited IRAs. Each sibling becomes a beneficiary and must follow specific rules for withdrawals. Surviving spouses, however, have the option to roll the inherited IRA into their own IRA account, allowing them to treat the inherited funds as their own. This process is straightforward and offers distinct benefits compared to non-spouse beneficiaries.
Siblings may split the funds into separate accounts called inherited IRAs. This allows each person to manage their share independently while following IRS rules.
Yes, beneficiaries are required to take distributions based on RMD (Required Minimum Distribution) rules or withdraw all assets within 10 years of the original owner's death.
Yes, withdrawals from an inherited traditional IRA are taxed as ordinary income. The amount depends on your tax bracket and how much you withdraw.
Splitting does not change the tax status of the account but lets each sibling handle their portion individually—potentially making it more advantageous for managing personal taxes.
If a beneficiary inherits at age 72 or later, they must continue taking RMDs starting in the year after inheriting the account—following its tax-advantaged retirement account guidelines.
